A multivariate innovations state space Beveridge Nelson decomposition

Abstract

The Beveridge Nelson vector innovation structural time series framework is new formu-
lation that decomposes a set of variables into their permanent and temporary components.
The framework models inter-series relationships and common features in a simple man-
ner. In particular, it is shown that this new speci¯cation is more simple than conventional
state space and cointegration approaches. The approach is illustrated using a trivariate
data set comprising the GD(N)P of Australia, America and the UK.